Should Corporate Tax Be Lowered in US?

Ireland has done that with its 5% corporate tax rate. It is likely that the EU will move to a standard corporate tax rate sometime in the next few years and if Ireland does not go along there will be serious repercussions in the refinancing of Ireland's huge national debt. It is only the continued frailty of the Euro that prevents Germany and France from putting the screws to Ireland over its corporate tax rate but that will not last for much longer. The fact that it was an issue at the G20 meeting is a way of putting nations on notice that being a tax avoidance haven is not going to be tolerated much longer.

There is a lot of incentive for nations to make agreements on things like this. For one thing it will increase economic and financial and fiscal certainty to some degree and preclude a race to the bottom that would harm everyone. Ireland and Estonia are two nations trying to gain by racing to the bottom on corporate tax rates but other nations cannot afford it at all so there is likely to be some unpleasant retaliation of one form or another despite all the treaties and trade agreements.

 

Only if we cut all government money going to environmental programs.

 

Corporations employ workers to make money. Once they have revenue, they pay taxes on that revenue.

For more detailed examples, look at the way the American economy has worked for the last 100 years.

I do not believe that, you lower taxes, corporations increase jobs...just for the hell of it. They will employ the least amount of people they need to in order to be profitable, and then pocket the rest as...profits. What they do with those profits is completely unmeasurable, so banking on them being reinvested or used to create additional jobs is wishful thinking at best(simply because you cannot say what will actually happen with them with any certainty).

A balance has to be found. Corporations can and should pay taxes. Those taxes should be reasonable, but unavoidable, and the penalties for not paying or trying to scam or glitz your way out paying them should be designed to inflict extreme punishment. Lower the tax rates from what they are now and close tax loopholes and remove regulations that allow for funny or shady accounting. Make sure the taxes that are owed are paid. Win-win. Tax rates gets lowered and more jobs potentially created and corporations face heavier legal penalties for not paying(just like people do now).

In my opinion, the penalty should, through a combination if paying the balance owed and punitive penalties, be made to cost the company more than paying the actual taxes would have cost them.

 

They pay taxes on profits.

That is true. But, when a product costs less, a business can sell more of it. More product means more employees.

If taxes are eliminated in the US, international businesses will adjust where they take profits to the US. That money will either be reinvested in the company (R&D, capital equipment, additional factories, etc.), resulting in more hiring.

Eliminating the cost of taxation (see below), increases export demand.

Eliminating the cost of taxes initiates a recalculation as to the cost of labor in favor of the US. Will the factories in China shut down, replaced with unskilled labor in the US, no. Taxes don't make up that huge difference in salary & benefits.

True, the many may not go back into that company, but is more likely to get invested in other US companies, or result in higher dividend payouts to stock holders.

The net result is the US will have more cash flow.

Why?

Two factors:

1. All taxes are paid from the sales of the corporations goods and / or services. In other words, taxes are paid by the consumer.
2. Most companies add value in a value chain, each step of that chain pays taxes. Taxes, on taxes, on taxes.... Use a car as an example, from the raw material; oil, metal ore, plant fibers, to a completed car takes how many steps?

Tax once at the conumer, and accomplish the same federal reveneu, while reducing the product cost in 3 ways.

1. Directly, in reduced tax payments.
2. Budsiness decision are made that are best for business, not best for business considering taxes.
3. Eliminate the tax analyzer's from the corporate payroll.

 

No, the opposite, treat all their products as imports and tax the crap out of them.

 

Let's pretend you have a corporation which has $20 million in taxable profits, so at 35% they would pay about $7 million in corporate tax. BTW, assuming maybe 5% net profit, this is a company with revenue around $400 million. So, this company has about $380 million in expenses/cost of doing business. Now...we can further assume or imagine that if this company was moved off-shore to locations which have greatly reduced labor and material costs, greatly reduced regulations and facility/energy costs, etc. in which maybe they might save 25% of their costs of doing business in the USA...this is $95 million in potential savings! Lastly, do you actually believe typical American companies will relocate their corporate offices and operating facilities to save the $7 million in taxation or the $95 million in operating costs? And...they will not save $7 million in taxation because all reasonable nations have taxation which must be paid (http://en.wikipedia.org/wiki/Tax_rates_around_the_world) so maybe the tax savings might only be 5% of the $7 million!

IMO, typical American companies operating off-shore do so because of the reduced costs of doing business and less regulations and to have facilities located in prime consumer areas...and ANY savings on corporate taxation is just a tiny bonus...

 

Take away the savings through import taxes, after all they are now not American companies in reality, and problem solved.

 

Thank you for your well thought out logical reasoning.

The FairTax is the most researched piece of legislation in American history. According to those who have researched this issue, corporations will respond to the FairTax. It's the reason that corporation keep their profits overseas. And move the bulk of their operations overseas. The US has the second highest corporate tax in the world. If they keep their profits overseas they don't pay taxes on it.

The FairTax through those incentives in reverse. You don't pay taxes here, but you pay taxes overseas. Again, look into the what those who have made the FairTax their life's work. Corporations respond to incentives.

 

Lets ignore the point that the company will move production to save the $95M, because the global market place will take market share if they don't remain competitive, and most likely wasn't making $20M in profits in the US.

The company is now making $105M in profits. If they realize those profits in the US, taxes increase to $36.75M. If they realize those profits in Hong Kong, the tax falls to $16.8M, a savings of $20M.

As noted above, the company makes only 5% profit. Making 5.5% is a huge increase.

 

If you tax everything as imports the only loser is the consumer.

 

Every time you add tax to something you cause inflation to the consumer. Either we allow imports or we do not and I doubt a day will come when the USA does not allow imports. Because if we don't allow imports, or tax the crap out of them, then we can also kiss goodbye our exports. Free and open trade means exactly free and open. The USA must compete with other nation's resources. It is stupid to try to bring back manufacturing of things that sell below a certain value...like maybe $15-$20. Why are no consumer electronics produced in the USA?

Can you define an American company?

 

No, if the price becomes too high people will not buy it, simple as that.
I do not want to stop imports but unless you have been living in a cave the ratio of imports to exports leans heavily toward imports being the way higher number, something like 80/20%, not good for our economy.
One that is performs most of it's business and manufacturing in America by Americans, meaning Toyota is, in many cases, more American than Ford.

 

I don't agree with your assessment why American companies have facilities around the world...it is definitely not because of corporate taxation.

American companies doing business in other nations PAY corporate taxes in that nation! As the link I provided above shows, the corporate taxes range all over the place but taxes are paid! So for example an American company pays 30% corporate tax in another nation on their taxable profits then if that company wishes to bring those profits back to the USA, the US wants to charge ANOTHER 35-39% or whatever the tax rate might be...and this would be STUPID. Why should the US government tax profits which were earned outside of this nation??? The FairTax program and all other ideas are nothing but gimmicks that don't solve a single problem. It's interesting that Toyota and Honda and all the other international companies doing business in the USA, with facilities in the USA, have no problem paying corporate taxes...yet the so-called American companies whine about this...

 

Who cares what taxes are paid? There are US companies and international companies located in every nation on this Earth. ALL OF THEM are paying taxes according to the nation in which they are doing business. Nothing is FREE!

If you want more companies in the USA, more manufacturing or whatever in the USA, then YOU and others need to figure out how to compete in the global marketplace. Toyota does just fine operating in the USA and Ford does just fine operating in Europe so what is the problem???

 

If you look at trade balance data, there is no 80/20%? http://www.census.gov/foreign-trade/statistics/historical/gands.txt

The USA MUST figure out how to compete with nations around the world in order to increase exports. If we cannot compete then the USA needs to innovate products and services which are only produced in the USA and this is not easy. Go ahead and tax imports all you wish but the consumer will pay for your plan with higher product prices. Not a week goes by in the USA that some group is not demanding pay increases, etc.; do you believe the US rise in the cost of doing business is going to help us compete in a global market? The ONLY good news in this is all of those foreign nations are also seeing inflation but they're still lower costs than the USA.

Don't agree with your definition of an American company. For example, Western Union has offices in every location around the world; are they a US company or foreign company? The same is true with rental car companies, hotels, restaurants, banks...

 

If taxes don't matter why not tax corporations at 100%? You think any company will stay in the US if all their profits is taxed away?

Japanese companies moved their operations here to get around step import tariffs.

Your above example about labor intensive companies exploiting cheap labor does hold water for some companies that need an army of employees in order to produce something. But when that is not the case, taxes will be a higher component in operating costs.

 

I never implied 'taxes don't matter'?? In the scheme of companies moving off-shore IMO taxes are not the key motivator.

Can you name a single Japanese company who located in the USA to save import tariffs?

I also never implied any company is 'exploiting' cheap labor? If a company must explore less expensive labor, or materials, or whatever, this is sound business practice...not exploiting.

Please name some companies you are referring who relocate off-shore but don't have a need for lower cost labor and materials, etc.?

 

The companies that have raise their prices to pay them.

No, but some countries are cheaper than others.

And, there is one country with a zero tax rate - Bahamas 0%

US companies are competitive, even when they manufacture in the US, otherwise they wouldn't survive.

The question is does lowering corporate tax rates have any benefit.

 

I just want to point something out that is very wrong and is a common misconception. Corporation tax is not paid by the customer. Taxes are paid according to the amount of profit taken in to the company during that year. The logic of "we'll raise the price so the customer pays for taxes as well" is wrong. For example, say a company selling candy bars sold them for 1.50 including the regular tax. Then they decided to plug the corporate tax into that so now the price is 1.75 Their tax would not be paid off by raising the price. They are taxed after the TOTAL revenue is calculated then taxed on that number.

Corporations can't just put some money aside and say, "Alright, this is for our taxes." They are taxed on the whole percentage of the money they make.

 

The problem is that USA needs her companies to stay in the USA. Those corporations are the ones who are really going to help our economy grow and flourish and right now, with how our debt is, we can't afford to loose them.

 

Taxes are on profits, not all the money a company makes. Assuming a company makes $100M, and clears $5M in profit. Taxes were 35%, so they were paying $1.75M in taxes. Taxes increase to 50%, increasing by $0.75M. To make the same profit after tax ($3.25M), they have to increase profits to $6.5M.

A candy bar's price is $1.50, retail. Wholesale price in $0.82, and the candy company sells it for $0.75.

With the tax increase, the company raises their price to $0.762, retail price won't increase to more than $1.53.

Or, the company can make the candy bar smaller, reducing cost by 1.5%, but keeping the $0.75 selling price.

Why not just accept lower profits? It could be that the company needs to replace worn out capital equipment, costing $3.43M. Being that cash is taxed as profit (minus the 5% they can depreciate over the next 20 years).

Until companies can print money - the only source of money they have is the customer. We will pay those taxes, one way or the other.


The question is, would you buy the services you get from the government for the price you pay in taxes?

 

Again...who cares what the tax rates might be? They are different everywhere and surely make sense to each nation to achieve whatever their goals might be. How many legitimate companies with thousands of employees and facilities are located in the Bahamas? US companies are only competitive on those items they are producing today; all of the products and services lost to off-shore over the past 30 years the US is not competitive or their are other mitigating circumstances like regulations. If you invented the next great electronics product you would probably do 90% of the sourcing off-shore in order to service the markets and remain competitive in the long run...if you can figure out how to change this you will solve all the employment issues! Simply lowering corporate tax rates certainly has benefit...BUT it depends on what benefits you are looking for? Maybe all the extra money will go to shareholders? Maybe it will just be stored up as cash? It will not increase demand of their products and services...this must be done by the consumers. If a company knows it will be taxed on profits, it will find ways to spend money, invest money, to expense against profits...if you lower tax rates this might change?

 

If a company is required to pay corporate tax to the government, then the cash required for this payment must be supplemented somewhere within the business. It might be possible to cut company-wide costs to free up money for taxes if the price of goods and services cannot be increased due to consumer demands or competitive pressures. Usually, and over the longer term of a business, there is an increase in the price of goods and services offered by that company. Therefore, it is very likely that the consumer is paying more for goods and services as corporate taxes increase.

Modifying your example above, we can assume if a company sells a candy bar for $1.50, this is enough money to pay all expenses INCLUDING taxation and earn a profit. If the taxation is increased, the company has maybe three choices; reduce it's profit as necessary, cut costs, increase prices...a fourth choice is to close the doors...

 

Lower corporate taxation does not assure companies will do more of their business in the USA. Corporate taxes are just one of many cost factors in a business model. Bottom line as always is if the USA is going to function in a global marketplace, then US companies must be competitive in the global marketplace. Corporate taxation is one of the factors but as I've said IMO they're not the main motivator to go off-shore; it's the cost of labor and materials and facilities and regulations and availability of talent and energy, etc. etc.

I'm sure there are a couple people on this forum with a big-enough brain to think through this problem?? We can do a very simple test; let's pretend we want to build 40" to 60" flatscreen TV's in the USA. Can US companies form sheet metal, injection molding of plastic parts, manufacture electronic components and wire and printed circuit boards, manufacture displays, transformers, printed labels and materials, etc. etc.? In the areas in which we don't do this work, can we find someone willing to invest million$/billion to create the state-of-the-art equipment and facilities? And when you're done paying US labor rates, and all the other business costs, can you be competitive with off-shore producers? If any of your answers are NO, all we need to do is figure out how to change the NO's to YES's...

 

Obviously you don't.

Set up a corporation, buy products from company "A" in China for $0.01 over cost (no profit), sell it to company "B" in the US (drop shipped directly from China) for $0.01 less than they sell it for (no profit) and keep the difference (profits), tax free.

The US is the second largest manufacturer, mostly through the use of automation.

Not only in the US. Foxconn, the worlds largest contract manufacturer (builds Apple products) has announced they will install 1 million robots, replacing 1 million (of their 1.23 million, mostly Chinese, work force).

Shareholders spend / invest their money. Cash will be invested.

And, for at least the 3rd time - reducing taxes on business, especially when it effects many steps between raw materials and final product, means our price is lower, increasing our exports.

If a compay gets to keep more of it's profits, it will do something with the money, spend it, invest it, grow the business, spend more on R&D. No matter how, the economy will prosper. And many companies will move activities that are marginally better off shore back to the US.